Dáil Éireann debate -
Thursday, 22 Oct 1998

Vol. 495 No. 6

Adjournment Debate. - Jailing of Building Workers.

Mr. Stagg

On behalf of tens of thousands of building workers and their families, I am calling on the Minister for Finance to end the C45 system of tax collection in the construction industry. Over six months ago in an Adjournment debate with my colleague, Deputy Tommy Broughan, the Minister was warned that building workers were in danger of being jailed for their principled opposition to the use of the C45 system, particularly on the Crampton's building sites. The Minister did nothing, and as we speak two building workers are incarcerated in Mountjoy Prison — not because they failed to pay their tax, not because they were working and claiming the dole.

I express my support for and solidarity with the building workers, and deplore the fact that two of their members have been thrown in jail. It is bizarre that the reason is that they wanted to pay their fair share of tax under the PAYE system, just like other PAYE tax-compliant workers.

Over many years, serious allegations of abuses of the tax system and social welfare codes have been made against certain employers and sub-contractors who use the C45 system. More than a quarter of a million C45s were issued in 1997 for 100,000 building workers, and many commentators have pointed out discrepancies in their use and in the number employed in construction. These figures tell their own story. The Minister must finally accept that the C45 system is a godsend to employers who wish to operate in the black economy and evade tax and social insurance.

To add to this, there are disturbing allegations also of the use of workers from Northern Ireland to facilitate the abuse of the North's and Republic's social welfare systems. The great mass of carpenters, bricklayers and plasterers and their assistants wish to return to the PAYE and social insurance system.

With the C45 system, workers have no provision for sickness, unemployment, holidays and, especially, none for retirement. The general taxpayer is left to carry the can and provide for construction workers because of the inequitable C45 system. Even in the long period of Tory rule in the UK, the Conservative Government felt their C45 system — known there as the 715 system — was a disaster and a huge front for their black economy, and they abolished it. So even Mrs. Thatcher regarded this approach as unfair and unjust.

A growing number of Irish builders have now returned to the PAYE system for their tradespeople in recent years. The Crampton organisation, however, has refused to negotiate with workers' representatives, BATU and OPATS, and have successfully sought injunctions to have workers sent to jail. Indeed, the Sunday Business Post has also been prevented by injunction from photographing Crampton's sites, yet serious allegations of false identities, 19 year old sub-contractors, and promises of cash-in-hand have been made about these sites.

Over six months ago, my colleague, Deputy Tommy Broughan, called on Dermot Quigley, Chairman of the Revenue Commissioners, the Minister for Social, Community and Family Affairs, Deputy Dermot Ahern, the Minister for Enterprise and Employment, Deputy Mary Harney, and the Minister for Finance, Deputy Charlie McCreevy, to investigate these allegations immediately. They have done nothing. It is clear this Government is not prepared to take on any of the serious issues in the building industry. Why? I would say it arises from the long-standing cosy arrangement between Fianna Fáil and the building industry, the builders in particular.

Perhaps Deputy Ivor Callely can answer this in the light of the scandalous remarks he made on the Order of Business on Tuesday when my colleague expressed his concern to the Taoiseach that these workers could end up in jail. Deputy Callely stated: "They should be in jail". Sadly, Deputy Callely's wish has come true, and he is probably now happy at the outcome.

In the forthcoming Finance Bill, I urge the Minister for Finance, Deputy McCreevy to abolish the C45 system for bricklayers, plasterers and carpenters and their assistants. This would prevent the current farcical situation of building workers being imprisoned because they want to pay their fair share of tax.

Minister for Finance (Mr. McCreevy)

One of the central issues here is the complaint about alleged black economy practices in the construction industry, and about pressures on building workers to accept sub-contractor rather than employee status. Sub-contracting itself is, and always has been, an integral part of the construction industry.

It will be useful to give a résumé of the system of tax collection as it has developed in the construction industry over the past 20 years or so. Persons employed in that industry are classified for tax purposes either as employees or sub-contractors and tax is deducted from each group on a different basis.

Payments to sub-contractors come within the Relevant Contracts Tax system — commonly referred to as the C2 or C45 system. Under this system, where a principal contractor makes a payment to an unregistered contractor, he or she is required to deduct Relevant Contracts Tax from those payments at the rate of 35 per cent.

The RCT system was introduced in the 1970s to counter the growing incidence of black economy activity in the construction industry. Workers operating under the system known as "the lump" were being paid without tax being deducted. This happened because the workers in question, mainly groups of tradesmen, were not employees of the main contractor making the payments and, accordingly, were not in the PAYE system. Under RCT, tax is deducted at the rate of 35 per cent from relevant payments except where the sub-contractor has produced a certificate of authorisation or C2 to the principal contractor, and the principal contractor has received a "relevant payments card" or C47 from the inspector of taxes authorising him to make payments without deducting tax.

To get a C2, a sub-contractor must operate from a fixed place of business in the State, and for a period of at least three years prior to the issue of the C2, must have fully complied with all his or her taxation and reporting obligations under the tax code. The Revenue Commissioners have confirmed that RCT continues to play a vital role in combating tax evasion in the construction industry.

Following a comprehensive review in 1995 and 1996, the Revenue Commissioners issued guidelines for the industry setting out the criteria under which a person may be regarded as an employee as distinct from a sub-contractor. Principal contractors and sub-contractors creating self-employment contractual arrangements must sign a joint declaration to the effect that these guidelines have been considered by them and they are both satisfied that the contract created is a contract of self-employment.

This joint declaration was introduced in line with the recommendation of a sub-committee of the Black Economy Monitoring Group which looked at the construction industry. It is of interest at this stage to list the current membership of that group. Its members are drawn from IBEC, the CIF, ICTU and the SFA as well as the Revenue Commissioners and the Department of Social, Community and Family Affairs. The Black Economy Monitoring Group has been in existence for some time. It was set up under the PESP, and has continued under each of the subsequent national agreements.

Both parties to the joint declaration certify that they have considered the guidelines issued by the Revenue Commissioners as to the difference between contracts of service — employment contracts — and contracts for services — self-employment — and are satisfied that the contract which they are about to enter is a contract for services.

RCT applies only to payments to self-employed sub-contractors. PAYE applies to payments by an employer to employees. The application of the RCT regime to genuine employees would deprive such individuals of social welfare benefits to which they are entitled. It would also mean a loss in PAYE, PRSI and levies. Some employers may consider that by operating the RCT system, the nature of the payments is changed from wages to payments to self-employed sub-contractors. This is a mistaken view. Even where a joint declaration has been completed, the question as to whether the contract is one of self-employment or of employment will depend on the nature of the facts of the case.

Where the relationship between a builder and a person to whom he or she makes payments is that of employer-employee, the builder is liable for the PAYE, PRSI and levies which should have been deducted from those payments, even where the parties have completed the joint declaration — form RCT1 — and the builder has deducted RCT from the payments and issued a C45. The Revenue Commissioners have recently completed a nationwide campaign to ensure the declarations made by principal contractors and subcontractors represent the true position. Where an employment is considered to exist and PAYE-PRSI and levies are not being deducted, the principal is being advised to put matters on a proper footing. Where this is not done, the principal will become liable for the PAYE-PRSI and levies. Each principal classified by the Revenue Commissioners as an employer can have that decision reviewed internally in the Revenue Commissioners and has a statutory right of appeal to the appeal commissioners.

In their ongoing drive to identify the correct basis of deduction of tax in respect of each individual, the Revenue Commissioners are happy to receive information from other organisations and individuals. Facilities have been made available to trade union representatives, for example, to report cases where they consider that PAYE should have applied instead of RCT.

The Revenue Commissioners have received a number of representations about the growth of self-employment in the construction industry. There is a strongly held view that a great number of persons in the industry who supply labour only services and are being treated as self-employed by principal contractors should be reclassified as employees. There have been campaigns on certain construction sites to ensure employers take on people as employees rather than as self-employed contractors where such people are more correctly classified as employees.

This is the background against which a nationwide compliance campaign was mounted by the Revenue Commissioners. The Revenue Commissioners are determined that the prescribed RCT procedures will be complied with. They cannot, however, dictate the terms under which workers are engaged in an industry. RCT is in place to ensure subcontractors in the construction industry do not escape their tax liabilities. While the increasing incidence of RCT may mirror a drift to self-employment within the industry, it is not the cause of the drift. It mirrors the worldwide trend towards contracting out and reflects the increased flexibility of work practices.

The Revenue Commissioners campaign to investigate possible abuses was completed recently. It involved visiting more than 7,000 principal contractors nationwide. No problems were found in 52 per cent of cases. Where problems were detected, the vast majority of employers, 74 per cent, agreed to abide by the Revenue Commissioners ruling. In cases where this ruling was not accepted, these may be subject to further Revenue Commissioners compliance activity, including follow-up visits, possible auditing and, where necessary, assessments of additional tax. A further indication of the in-depth nature of the compliance campaign which the Revenue Commissioners undertook is that in the Dublin area alone the status of more than 35,000 subcontractors was examined.

A Revenue Commissioners ruling may be challenged by an employer who is entitled to appeal to the Appeal Commissioners if he considers a ruling to be incorrect. In this context, the total of approximately 87 per cent of all principal contractors with whom the Revenue Commissioners would now be in agreement is a significant pointer to the level of compliance in the area.

Deputies will appreciate that there have always been difficulties in the construction industry. I am confident, however, that the efforts which have been made to counter the black economy in this sector will lead to improvements.